Date: 20000531
Docket: 98-2650-IT-I
BETWEEN:
KEITH WHYBROW,
Appellant
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Scott Simser
____________________________________________________________________
Reasonsfor Judgment
(Delivered orally from the bench at Toronto, Ontario, on April 18, 2000)
McArthur J.T.C.C.
[1] This is an appeal wherein the Appellant as director of 954228 Ontario Limited was assessed by the Minister of National Revenue in the amount of approximately $10,000 plus a further $4,000 in interest and penalty for having deducted income tax at source from employees but not having remitted that money to the Minister. The Appellant states that he met the standard necessary to be exempted from liability under the due diligence provisions of subsection 227.1(3) of the Income Tax Act. Also, the Appellant states that he resigned as director of 954228 on March 21, 1995, more than two years before the Notice of Assessment dated July 21, 1997 and is therefore exempt under subsection 227.1(4) of the Act. The Appellant appeared on his own behalf and was the only witness.
[2] The facts, as I find them, include the following. The Appellant, from the inception of 954228 in 1992 was a 25% shareholder and director. The corporation was carrying on a pool room business under the name of Blues & Cues. The company lost money in 1992 and 1993 and showed a small profit of $1,600 in 1994. The Appellant and Gene Lew were the operating partners until February or March, 1995 when the financial partners, brothers Joe and Tom Kovacevic, took over because the brothers had become dissatisfied with the management by the Appellant and Mr. Lew.
[3] Blues & Cues had 20 to 30 employees and failed to remit income tax deductions, CPP contributions and EI premiums for the months of July, September and December 1994 and for a further three months in 1995, including I believe February and March. By March 1995, the Appellant was no longer an active manager. He states in his Notice of Appeal that after that date, he consistently and repeatedly demanded accounting information from Mr. Kovacevic and requested that he attend to all amounts owing to all government departments to no avail. In or about July 1995, through the Appellant's efforts, the shareholders received an offer to purchase the business from a third party. Mr. Kovacevic exercised his right to match the third party offer pursuant to the Financing Agreement and later failed to close the transaction as required by that Agreement, thereby denying the Appellant and the company the opportunity to pay all the outstanding debts.
[4] In April 1996, the Appellant received letters from Revenue Canada regarding director's liability from source deductions owing, to which he promptly replied in each case. The Appellant relies on an apparent fax (Exhibit A-4) from himself to Paul Chadwick dated March 21, 1995, which reads as follows:
TO: PAUL CHADWICK
FROM: KEITH WHYBROW
RE: 954228 ONTARIO INC T/A BLUES & CUES MISSISSAUGA
PAUL,
I am resigning as a Director of the above mentioned company effectively immediately. Would you please make the appropriate entries and filings.
Yours sincerely,
Keith Whybrow
Original + sent via mail
[5] The position of counsel for the Respondent is that this resignation is not authentic and is a fabrication. I agree with that position for the following reasons. There is no corroborating evidence of its authenticity. No original was produced and it is unsigned. There is no copy of the original nor confirmation that it was faxed and it was purportedly sent to the corporation's solicitor Mr. Chadwick, but never acted upon. In this regard it is somewhat unclear whether Mr. Chadwick was acting solely for the Kovacevic brothers or for the company. His role was blended somewhat. In his detailed account (Exhibit A-5), Mr. Chadwick refers to the following items on March 21 and 22, 1995:
March 21/95 TELEPHONE CONVERSATION WITH CLLIENT
to Keith re issue of guarantee of $20,000 at bank;
March 21/95 MEETING WITH CLIENT
meet with Tom Kovacevic and advise that cannot release minute books; agreed to provide with copies of proceedings in minute book and draft shareholders agreement;
March 22/95 TELEPHONE CONVERSATION WITH CLIENT
to Gene and Keith re corporate issues;
March 22/95 DOCUMENT PREPARATION
prepare document;
March 22/95 CORRESPONDENCE
letter to Tom re minute book;
March 22/95 TELEPHONE CONVERSATION WITH CLIENT
to Keith re status as officer and director;"
With such detail, it is unbelievable that Mr. Chadwick would not have referred to something as important as a director's resignation. By letter dated March 22, 1995 Mr. Chadwick wrote as solicitor for the Kovacevics and offered the Appellant $10,000 for his resignation and other acts. The Appellant did not accept the offer. That letter (Exhibit A-6) reads in part as follows:
... We have been instructed by Tom Kovacevic and Joe Kovacevic to take such steps as may be necessary or desirable to the end that Keith Whybrow and Gene Lew cease to be directors, officers and shareholders of the corporation and have no further right, title and interest whatsoever in Blues and Cues in Mississauga.
[6] In 1996, the Appellant commenced, I believe, a small claims action against Tom Kovacevic and states in his statement of claim that he is a shareholder and director of 954228. It is unlikely that the Appellant would resign leaving the Kovacevic brothers majority directors. After March 1995, he remained very active in trying to stay on top of the finances of the operation. It is important to note that it was while he was an active inside director that most of the unremitted amounts were incurred. The damage was done while the Appellant was in control of the financing.
[7] With respect to the defence of due diligence, I also find that the Appellant fails. The decision of the Federal Court of Appeal in Soper v The Queen[1] gives guidance with respect to the principles governing the conduct of directors when applying the due diligence test. These principles include the standard of care is flexible and the analyst must look at all the circumstances. The standard of care for director's liability is partly objective and partly subjective. Once a director is aware or should be aware that there are problems with remittances, he or she has a positive duty to act. An inside director will be held to a higher standard of care than an outside director.
[8] The Appellant was aware in 1994 of a problem with remittances and he had a positive duty to act. He did act vigorously after April 1995 but then the damage had been done and it was too late. He had been deeply involved in the day-to-day management of the company before April 1995 but he chose not to have the arrears to the Minister brought up-to-date during this period. His actions, after he was no longer active in management, did not serve a useful purpose.
[9] This case, like most director liability cases, turns on its facts. The Appellant was one of two operating managers of a billiard and bar establishment. During his period of responsibility, the business had between 20 and 30 employees. The Appellant was aware that payroll deductions were collected but not remitted to Revenue Canada. Obviously, the Appellant had a priority list of creditors and part of the money collected for Revenue Canada from employees' wages was used to pay others. Judge Bowman's approach to the due diligence defence is of assistance. In Jess v The Queen,[2] he stated:
What would a reasonable person in the position of the Appellant have done at the time to ensure that the government was paid its tax?
In Cloutier et al v M.N.R., 93 DTC 544 I put the approach which I follow in these cases at pages 545 and 546:
The question therefore becomes one of fact and the court must to the extent possible attempt to determine what a reasonably prudent person ought to have done and could have done at the time in comparable circumstances. Attempts by the courts to conjure up the hypothetical reasonable person have not always been an unqualified success. Tests have been developed, refined and repeated in order to give the process the appearance of rationality and objectivity. But ultimately the judge deciding the matter must apply his own concepts of common sense and fairness.?? It is easy to be wise in retrospect and the court must endeavour to avoid asking the question "What would I have done, knowing what I know now?" It is not that sort of ex post facto judgment that is required here. Many judgment calls that turn out in retrospect to have been wrong would not have been made if the person making them had the benefit of hindsight at the time.
[10] In the present situation the Appellant for the most part was an inside director as described in Soper. He knew the business was in financial difficulty. He knew that it had not remitted several months of employee deductions. Up to February 1995, he took no action, or at least insufficient positive action, to have Revenue Canada brought up-to-date. When he was forced out of management in March 1995, when the business was already some five months in arrears of remittances, he began to request the new management to make up the arrears. This is not due diligence. The appeal is dismissed.
Signed at Ottawa, Canada, this 31st day of May, 2000.
"C.H. McArthur"
J.T.C.C.
COURT FILE NO.: 98-2650(IT)I
STYLE OF CAUSE: Keith Whybrow and Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 18, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge C.H. McArthur
DATE OF JUDGMENT: May 8, 2000
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Scott Simser
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada